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Wednesday, March 30, 2016

Berkshire Hathaway Profited On ENRON BONDS

FEBRUARY 28,2007 Berkshire Hathaway Shareholder Letter

"We continue, however, to need “elephants” in order for us to use Berkshire’s flood of incoming
cash. Charlie and I must therefore ignore the pursuit of mice and focus our acquisition efforts on much
bigger game.
Our exemplar is the older man who crashed his grocery cart into that of a much younger fellow
while both were shopping. The elderly man explained apologetically that he had lost track of his wife and
was preoccupied searching for her. His new acquaintance said that by coincidence his wife had also
wandered off and suggested that it might be more efficient if they jointly looked for the two women.
Agreeing, the older man asked his new companion what his wife looked like. “She’s a gorgeous blonde,”
the fellow answered, “with a body that would cause a bishop to go through a stained glass window, and
she’s wearing tight white shorts. How about yours?” The senior citizen wasted no words: “Forget her,
we’ll look for yours.”

"in 2002-2003 we spent about $82 million buying – of all things – Enron bonds, some of
which were denominated in Euros. Already we’ve received distributions of $179 million from these bonds,
and our remaining stake is worth $173 million. That means our overall gain is $270 million, part of which
came from the appreciation of the Euro that took place after our bond purchase. "

"Already the prediction I made last year about
one fall-out from our spending binge has come true: The “investment income” account of our country –
positive in every previous year since 1915 – turned negative in 2006. Foreigners now earn more on their
U.S. investments than we do on our investments abroad. In effect, we’ve used up our bank account and
turned to our credit card. And, like everyone who gets in hock, the U.S. will now experience “reverse
compounding” as we pay ever-increasing amounts of interest on interest. "

"I want to emphasize that even though our course is unwise, Americans will live better ten or
twenty years from now than they do today. Per-capita wealth will increase. But our citizens will also be
forced every year to ship a significant portion of their current production abroad merely to service the cost
of our huge debtor position. It won’t be pleasant to work part of each day to pay for the over-consumption of your ancestors. I believe that at some point in the future U.S. workers and voters will find this annual
“tribute” so onerous that there will be a severe political backlash. How that will play out in markets is
impossible to predict – but to expect a “soft landing” seems like wishful thinking."

"Over time, markets will do extraordinary, even bizarre, things. A single, big mistake could wipe
out a long string of successes. We therefore need someone genetically programmed to recognize and avoid
serious risks, including those never before encountered. Certain perils that lurk in investment strategies
cannot be spotted by use of the models commonly employed today by financial institutions."